Alan Simpson paints dire market outlook

FORTUNE — Prepare for an increasingly rough ride in world stock markets as the march toward the so-called fiscal cliff continues in Washington, predicts former Sen. Alan Simpson, R-WY., who co-chaired the 2010 “National Commission on Fiscal Responsibility and Reform.”

Simpson expects financial markets to roil as extremists on both the right and the left continue to be determined to propel a tumble over the so-called ‘fiscal cliff,” now set for year’s end.

At the moment, the possible compromise he envisions would be no more than a tentative non-partisan agreement. He sees it emerging just before New Year’s Eve and heralded by an equal number of Republicans and Democrats scribbling a one-page outline on a scrap of paper. That proposal would separate Social Security reform, agree to reduce Medicare and cut the defense budget.

In a speech in New York City Monday to a non-partisan, politically-attuned group called The Common Good, Simpson said the stalemate that appears to be playing out in the news may be what is really going on in Washington with Congress, even behind the scenes.

“I don’t really feel they are playing games now. I think they are totally confused,” Simpson said. “But they know the President has one basic thing on his mind: raising taxes on the rich and let me tell you folks: That’s going to happen.”

Both Simpson and Erskine Bowles, the Democrat from the Clinton administration who co-chaired the commission that put out a 64-page plan for reform entitled “The Moment of Truth,” have been under non-stop attack since their report was released two years ago.

Simpson says Bowles “used to think we had a chance not to go off the cliff, but now he thinks it is a one-third chance. I think we will go off the cliff and the markets will call the shots and the chaos will be destructive.”

Referring to the market turmoil in Europe over the need for tax and spending reform, Simpson said: “We are the healthiest horse in the glue factory.”

“Just a single piece of paper will get the markets off our case,” Simpson said. “Germany has a plan – it’s not in writing but it’s a plan, so the markets don’t bother them. France is stumbling. If they don’t write something on the back of a piece of paper soon, why that will be the core of Europe begin to rot out. And this all affects us.”

Asked by Fortune what advice he would give middle class investors who wonder whether they should sell stocks before the end of the year, Simpson demurred: “I wouldn’t advise anybody to do anything, but I can tell you now and before Dec. 31, I think “hunker” would be a hell of a word.”

Like the vaudeville performer his critics accuse him of being, the 81-year-old once known in the U.S. Senate for his wit worked the lunch held in the Milton Berle Room at The Friars Club), firing off old jokes and fresh bon mots.

“Right now, knowledge and wisdom are being slaughtered by special interest groups who are so appalled that someone could take away from them something that they stuck in the tax code back in 1960 that saved them a wad and the little guy paid the difference.”

Simpson focused his disdain on the 70 or right wing Tea Party members in Congress inspired by anti-tax activist Grover Norquist and on another group he called leftwing, the AARP (American Association of Retired People) that he dismissed as a “marketing organization.”

Talking about the Tea Party “worming its way” into American politics, Simpson said: “You’ve got 70 Republicans now – 70 guys who didn’t come to limit government, they came to stop it and when you have that, you have a serious situation.” About the AARP’s resistance to reform of Social Security, Medicare and taxes, Simpson said: “This is a marketing organization; they don’t give a rat’s fanny about their grandchildren. They care about money and they make a ton of it.”

“If we are enthralled with these two outfits and jerks, the country will not make it through the next 30 days,” Simpson said. “The country needs patriots instead of panderers.”

The former Senator urged voters to bombard their Congressmen with calls and letters during the next week about the urgency of the need for a deal before the stock markets get more volatile.

Now that he has been re-elected, President Obama “will begin to lead…The political guys will go home, he will begin to use his heart and his real instincts and his political guts, if you will, that have been absent.”

The luncheon speech was one of dozens that Simpson says he and Bowles have given since their report came out two years ago. He says they have raised more than $45 million for their group FixTheDebt.org from 150 chief executive officers of Fortune 500 companies and others who beg them to “Save us from ourselves.”

Members of Congress who have the “guts” to support reforms will get campaign contributions from Simpson’s group to help them fend off challenges in the next primaries by the left and right wing.

One of the latest attacks on Simpson and Bowles appeared Monday on the Huffington Post in a piece by Leo W. Gerard, the International President of the United Steelworkers Union. Gerard chastised the two men for collecting tens of thousands of dollars for speeches in the piece headlined” “It’s the Simpson-Bowles Personal Profit Tour Making Money off the US Debt.”

In an interview with Fortune after that speech, Simpson said there had been no charge for the lunchtime talk and defended being paid for speeches arranged by the Washington Speakers Bureau, which began representing him after he left the Senate in 1997.

Gerard’s attack did not surprise Simpson, who says he loves “pissing people off.” He said: “The unions have never been on my side,” even though he says their membership will be hurt first and most by higher interest rates and inflation if the government fails at fiscal reform.

Simpson also said the Huffington Post has long criticized him harshly. “I don’t listen to their dribble. Arianna Huffington has been after my ass ever since she left Washington under a cloud….When she was in Washington, she hung around the Republicans like a poor relative. Her husband ran for the Senate [as a Republican from California] and she toadied up to all of them. Now, she doesn’t want to have anything to do with them.”

Almost inadvertently, Fortune ran into Ms. Huffington Monday evening inside the Temple of Dendur at the Metropolitan Museum of Art reception sponsored by Shafik Gabr, an Egyptian industrialist. At first, Huffington offered a business card and told Fortune: “Call me in the morning.” Pressed for immediate comment about the United Steelworkers’ President’s piece about Simpson on HuffPost.com and about the former Senator’s criticism of her and her website, Huffington said: “ No. No. I love Alan. He’s a great guy. What a great guy.”